Open Banking is no longer on the horizon—it’s very much here. There are now more than two million Brits using Open Banking-based products, with this number having doubled since the start of 2020, despite the disruption caused by COVID-19.
With the pandemic causing unprecedented levels of upheaval to many areas of the banking industry, banks have been forced to re-evaluate their customer relationships and product offerings. With the audience in place and the shift in banks’ priorities caused by the pandemic, it is now the right time for banks and consumers to take advantage of the Open Banking framework, and 2021 could be the year when Open Banking finally fulfils its promise.
What is Open Banking?
Open Banking is a secure way for banks to share financial data and services with third-party providers (TPPs)—such as fintechs (financial-technology firms)—with customers’ consent using technologies such as application programming interfaces (APIs). It defies one of the core principles of banking—that customer information should be protected as a value asset by sharing the data in open and collaborative ecosystems.
The collaboration brought by Open Banking allows banks to gain more insights by safely and securely sharing customer transaction data with third-party stakeholders, and this can be used to provide personalised recommendations to customers based on real-time, data-based insights. For consumers, it means they can pay directly through their bank account when they are making transactions online, allowing them to keep track of their balances and outgoings easily.
Open Banking essentially provides customers with better experiences by building on brand trust and security, improving payment experiences and increasing transaction-approval rates. And for merchants, it reduces processing costs, as there are no interchange or scheme fees, while it also removes chargebacks—making the process seamless and simple.
Open Banking goes global.
There are two different drivers for Open Banking. The first is the regulatory initiative to drive competition. Both the revised Payment Services Directive (PSD2) in Europe and the United Kingdom’s Open Banking regulation were introduced to help drive adoption. These require financial institutions to share consumer financial data with non-banks with the permission of the account holder.
More and more countries, including Australia, Brazil and the United Arab Emirates, are now progressing with their Open Banking regulations. But with different countries having different regulations, there is currently no global API standard, which leads to complexities when processing transactions between countries. Businesses, therefore, must integrate with those APIs and require permissions and licences to make those transactions happen.
Over the coming year, we can expect to see movement towards a single API, which would provide better access to Open Banking. Regulators will need to break down their own sectoral and geographical regulations and put the protection and fair use of customer data at the top of their agendas.
The second driver for adoption is technology. The COVID-19 pandemic has only exacerbated the ongoing digitisation of all industries; the emergence of APIs and real-time payments means consumers are now demanding accessibility, speed and convenience in payments.
Now more than ever, banks need to meet the increasing demand for online and mobile solutions, and Open Banking can be used as a vehicle for this. Technology companies are now beginning to work with banks more openly, simplifying and providing greater transparency in the financial-services industry, and collaborative ecosystems can help speed up the digital transformation.
Securing Open Banking
While Open Banking adoption numbers are growing, there is still a long way to go, and concerns around security, privacy and fraud remain. The main concern revolves around how the banks can ensure privacy and security once the data is beyond their walls; fraudsters can then take advantage of APIs, which is a risk for consumers, banks and third-party providers.
These threats mean that usual cybersecurity protocols are no longer enough. Instead, banks need the infrastructure and capabilities in place to identify the third-party API vulnerabilities. This can be achieved through multi-factor authentication (MFA), and we expect more and more banks to adopt this in the coming year. Artificial intelligence (AI) and machine learning (ML) systems can also be used to analyse data and payment histories and look for suspicious activity. As more banks begin to adopt Open Banking, these advanced systems will be required to help alleviate consumers’ security concerns.
Open Banking beyond data
The future of Open Banking means gaining access to everything, and once banks and fintechs begin working together more smoothly, there will be room for innovation. Banks will need to shift from simply offering their current products to adopting more sophisticated ways of enhancing the customer experience and driving loyalty. Financial advice is an excellent example. Banks need to have multiple customer touchpoints in place so that customers are followed by an invisible army of “digital advisors” that guide their daily financial decision-making. Tools that allow financial institutions to bridge the digital and physical—such as augmented reality (AR), virtual reality (VR) and mixed reality along with voice response—will be core components of these systems.
We are currently seeing the next generation of “cognitive technology” being developed and deployed. These applications will work across a bank’s entire technology stack and use multiple services to provide more intuitive experiences to customers. Machine learning, deep learning (DL), natural language processing (NLP) and a large number of AI disciplines will create new opportunities to provide value-added services for customers, providing additional support, such as optimised, customised know-your-customer (KYC) products.
We could also see the introduction of new premium APIs that provide greater functionality and potential for innovation, but these will require additional agreements between banks and third parties to be formed. The impact of this technological development will be compounded by its deployment into the more interconnected ecosystem brought into existence through Open Banking. Banks and their customers both stand to benefit massively.
The time for Open Baking is now.
Open Banking looks set to finally fulfil its promise over the coming year. Current regulation has made access to the technology quite slow, and this has stalled adoption for many. But now, with the world permanently changed by COVID-19 and the benefits of Open Banking there for all to see, its adoption looks set to continue at an accelerated growth rate.
Fintechs and banks will work together to make the infrastructure more accessible while attempting to alleviate the security threats and data-privacy concerns with new technologies. The convenience and personalisation provided by Open Banking offer huge opportunities not just for consumers but also for small and medium-sized enterprises as they look to bounce back from a difficult 2020. Meaning it is now finally time for Open Banking to reach its full potential.